At a time when the largest economy in the world is swinging its support behind high-quality voluntary carbon projects, the insurance sector stands at a pivotal juncture. The US government's backing shows how these projects can channel significant private capital in the fight against climate change, with projects earmarked for their ability to reduce carbon emissions and reverse environmental damage. Yet there’s more to this story. A series of high-profile disruptions such as the Rimba Raya Biodiversity Reserve Project demonstrate only too well how these markets can be fraught with risk.
This is the insurance sector’s carbon calling. With the right insurance products, we can help tackle this risk, encourage participation in high-quality projects and help drive the climate transition.
Embracing this call is about more than corporate responsibility; it’s about supporting the climate transition and leading a transformative wave for change.
The insurance sector’s role in the climate transition
From insuring renewable energy projects to covering sustainable agriculture practices, insurance is uniquely positioned to make a real, positive difference in this space. The sector’s involvement not only helps to stabilize and secure climate transition processes but also sends a strong signal to the market about the viability and importance of sustainable practices—in support of the US government’s rallying call.
One of the most prominent nature-based projects in voluntary carbon markets, the Rimba Raya Biodiversity Reserve Project shows just how insurance can address specific risks in the climate transition. Delivery risk refers to the risk of carbon credits not being delivered as agreed, and can be driven by factors including natural disasters such as wildfires and flooding, fraud and political intervention.
Rimba Raya first experienced challenges when Indonesia issued an export ban on carbon credits back in 2022. Since then the project encountered licensing issues, throwing the delivery of credits into doubt and highlighting long-standing concerns around voluntary carbon markets in terms of regulatory risks and project transparency. Considering these headlines, it’s no surprise that 75% of respondents to a recent CFC survey stated they are ‘very concerned’ about delivery shortfall, with 65% revealing they are current buyers who have experienced shortfalls firsthand.
But it doesn’t have to be this way.
De-risking climate solutions : A new frontier for insurance
Already the insurance industry is developing products to mitigate this risk—one example being covering the non-delivery of carbon credits in forward-purchase agreements. For instances like Rimba Raya, entities who had forward-purchased credits with insurance in place would have received cover for financial losses associated with the non-delivery, safeguarding their investment and encouraging future participation in the market.
What’s more, businesses recognize the impact insurance could have in boosting market confidence and stability, with some 85% of respondents to the CFC survey stating they are ‘very likely’ to consider buying under-delivery insurance. Products are covering a range of climate-related risks, from insuring renewable energy projects against operational risks to covering green buildings and sustainable agriculture—showing the sector’s commitment to securing a sustainable future.
Of course, the path ahead isn’t without challenges. Long-term, uncertain factors can make assessing and pricing climate-related risks complex. Then there’s the challenge of balancing traditional risk management with the need to support innovative yet sometimes untested climate solutions. Overcoming these challenges requires investment into research and collaboration with environmental experts and scientists, along with a readiness to create supportive regulatory frameworks and incentives for developing climate-focused insurance products.
Rallying call: Gathering to build a better future
As the world grapples with the escalating impacts of climate change, the insurance sector’s engagement in de-risking climate solutions is not just an opportunity but a necessity. Few industries are better placed to help drive the climate transition, be it bolstering voluntary carbon markets or ensuring the viability of renewable energy projects. The fact that 50% of non-buyers responding to the CFC survey stated they would be more inclined to purchase carbon credits if they could be insured is a huge call to action for the sector.
It's time to seize the carbon opportunity with both hands. Only then can the sector contribute significantly to a more sustainable, resilient planet—by giving businesses the support they need to enter voluntary carbon markets with confidence.
Discover why the carbon market is the biggest insurance opportunity in decades in our new carbon insurance report. Inside you’ll get results from the CFC survey, a history of carbon markets to date, and insights on how insurance can deliver key benefits.
